Part 2: Setting up shop in a hotel

In Part 1 of this article we explored the upsides of opening your pizzeria in a hotel. However, like all business arrangements for a restaurateur, there are going to be downsides.

Lease negotiation is something like getting married. If it all works out, you are in it for a long and happy time. In case it doesn’t, you need to establish your options beforehand.

In Part 1 of this article we explored the upsides of opening your pizzeria in a hotel. However, like all business arrangements for a restaurateur, there are going to be downsides.

In a hotel, you can’t operate exclusively as a pizzeria unless it is completely detached from the other facilities and service areas. The exception to this is the larger property that may have a pizzeria in addition to its other restaurant and banquet facilities. Although pizza may be the number one menu item, the standard staples still must be included in the fare.

No longer will you prosper or fail based entirely on your own actions and decisions. It will be necessary to adapt your operating style, including hours of service, catering, pricing, pizza delivery and carry out, to that of the hotel. The opportunity to fixture the restaurant to your own taste and theme is usually denied. This also applies to the menu. Although you are not an employee, you are subject to the whims, wishes, and operating style of the hotel management. The final word is theirs. If management is weak and their mismanagement is driving away customers, you too will suffer. But, if they are aggressive merchandisers, you will benefit. Patrons will never completely separate the management of the hotel from that of the restaurant.

Being experienced, financially capable, willing and able as a prospective hotel restaurant lessee, your first concern is to structure an agreement that is beneficial to both parties. If either takes unfair advantage of the other it will soon fall apart. Establishing a fair rent is probably the most difficult part. The National Restaurant Association, whose American figures on this subject are quite applicable in Canada, indicates that most restaurant rentals range from five to 10 per cent of gross sales with a median of eight per cent. Per cent variances depend on what is included in the rent and the negotiating ability of both parties. However, in recent years these percentages have been declining. Where all FF&E is provided, which is typical with hotel leases (as are utilities, security, billing, janitorial service and maintenance), the hotel would be entitled to more where these are additional. A percentage of the sales is the easiest way to determine a rental amount, yet it could create a host of problems. For example if you have a pizza carryout service and deliver pizzas to the rooms late at night, is the hotel entitled to the same rental as it would be if all your customers sit down? And, if you are a very successful operator, on a per cent of gross, you will be penalized, but if a poor one the hotel will be a loser and looking to terminate the arrangement.

The alternative, which works better for both parties, is to calculate a fixed per month rental amount. However, there are many contingencies and your negotiating ability comes into play. Know how much money the hotel is losing now and how badly you are wanted. The starting point is to detail, other than floor space, what the hotel will provide by way of fixed costs, including utilities, janitorial services, property taxes, insurance, parking lot maintenance, security, etc. Your charge for these should be based on the per cent of the gross area of the hotel your restaurant occupies. For example, your restaurant occupies 15 per cent of the total floor area of the hotel you should pay 15 per cent of the applicable costs. If you are responsible for maintaining the FF&E and small wears replacement, ensure everything is in good condition and working when you start. If something is not, trash it now. Count the knives and forks you will be responsible for replacing. When you get to the bottom of the hotel’s expenses, which you would pay in a free standing pizzeria, you have the basics. Add to this a fair return on the hotel’s investment for your portion of the real estate and on the FF&E provided and you have structured what the hotelier would like to have. Now negotiate. Always keep in mind that there are three prices on everything; what the hotelier would like to have, what he wants, and what he will settle for.

For many hotel restaurants, banquets, catering, weddings, conventions, carryout pizzas are a bonus. There is a lower labour cost, better pricing, and as most events are usually in the evening, more profits are produced at a slower time. The hotel would argue that they should have a rental amount above the fixed basic from these sales where a fixed monthly rental formula is used, or even a higher per cent when everything is on a per cent of gross sales. There is no fixed formula for liquor sales at these events in regards to who owns the liquor, who sells and who pours. This is still truer if the hotel does the booking and controls the scheduling. On the other hand, room service, because of its inconsistency and odd hours, may be entitled to less rent than the normal operation. Many overcome this problem by having a higher menu pricing schedule for room service. The restaurant will want to be compensated where a complimentary breakfast is included in the room charge and hors d’oeuvres are served in the lounge in the afternoon.

Lease negotiation is something like getting married. If it all works out, you are in it for a long and happy time. In case it doesn’t, you need to establish your options beforehand. The starting point is a well structured, well written, lease agreement where you and the hotel
management understand and have agreed to all of the terms and conditions. Leave nothing to chance. You will want renewal options if everything goes as planned and an early termination/kick-out clause if it does not. Have the lease drawn up by a qualified lawyer who understands commercial leases, particularly restaurant leases. Not all do. Never use one of these preprinted forms you can buy in a stationary store or get off the internet. They don’t work.

Principal negotiating and agreement points centre around the premises and property use including common areas such as lobbies and parking lots, care and control, length of lease, the rental structure, division of fixed and variable operating costs, hours of operation, menu structure, pricing, definition of gross sales if it is a percentage lease, liquor service in the restaurant, banquet and meeting room food and liquor service, on and off premises catering, carryout pizzas, complimentary food and beverages for hotel guests, guest billing for restaurant services, replacement of lost, broken or worn out FF&E and small wares, premises maintenance and repair, health and safety standards, hotel management’s imposed standards, marketing and advertising.

The bottom line is that leasing the food services facilities in a progressive hotel can be a win-win for both the restaurateur and the hotel. But, if not properly set up and judiciously supervised it has as much potential to become a nightmare. Both parties are forming a quasi partnership, perhaps not a legal partnership, but one for day-to-day functions, marketing and performance. Ensure you know your partner’s objectives and management styles beforehand. Although it is the hotel management who is in control and they can add to or detract from your operation, nothing pleases most hoteliers more than to be relieved of the responsibilities of the foodservice department.

Lloyd Manning is a semi-retired commercial real estate and business appraiser, broker and financial analyst. He has had four business books published. He now writes articles for trade magazines on business topics. Lloyd resides in Lloydminster, Alta., and can be reached at lloydmann@shaw.ca.